Page 406 - The Principle of Economics

414 PART SIX
THE ECONOMICS OF LABOR MARKETS
N The economy’s income is distributed in the markets for the factors of production. The three most important factors of production are labor, land, and capital.
N The demand for factors, such as labor, is a derived demand that comes from firms that use the factors to produce goods and services. Competitive, profit- maximizing firms hire each factor up to the point at which the value of the marginal product of the factor equals its price.
N The supply of labor arises from individuals’ tradeoff between work and leisure. An upward-sloping labor supply curve means that people respond to an increase in the wage by enjoying less leisure and working more hours.
N The price paid to each factor adjusts to balance the supply and demand for that factor. Because factor demand reflects the value of the marginal product of that factor, in equilibrium each factor is compensated according to its marginal contribution to the production of goods and services.
N Because factors of production are used together, the marginal product of any one factor depends on the quantities of all factors that are available. As a result, a change in the supply of one factor alters the equilibrium earnings of all the factors.
The demand, in turn, depends on that particular factor’s marginal productivity. In equilibrium, each factor of production earns the value of its marginal contribution to the production of goods and services.
The neoclassical theory of distribution is widely accepted. Most economists begin with the neoclassical theory when trying to explain how the U.S. economy’s $8 trillion of income is distributed among the economy’s various members. In the following two chapters, we consider the distribution of income in more detail. As you will see, the neoclassical theory provides the framework for this discussion.
Even at this point you can use the theory to answer the question that began this chapter: Why are computer programmers paid more than gas station atten- dants? It is because programmers can produce a good of greater market value than can a gas station attendant. People are willing to pay dearly for a good computer game, but they are willing to pay little to have their gas pumped and their wind- shield washed. The wages of these workers reflect the market prices of the goods they produce. If people suddenly got tired of using computers and decided to spend more time driving, the prices of these goods would change, and so would the equilibrium wages of these two groups of workers.
Summary
Key Concepts
factors of production, p. 398 marginal product of labor, p. 400 production function, p. 400 diminishing marginal product, p. 401
Questions for Review
value of the marginal product, p. 401 capital, p. 410
1. Explain how a firm’s production function is related to its marginal product of labor, how a firm’s marginal product of labor is related to the value
of its marginal product, and how a firm’s value of marginal product is related to its demand for labor.